California's Hidden Gas Tax Is Due for Reform
With the gradual re-opening of the Strait of Hormuz, gas prices have finally started falling. Yet California drivers are still paying more than anyone else in the country. In mid-June, regular gas averaged over $5.50 per gallon compared with about $4.00 nationally. Pump prices will remain high across the state until Sacramento reforms the policies that artificially raise fuel costs.
Among those policies, the Low Carbon Fuel Standard (LCFS) is especially overdue for reform. It should impose lower costs on drivers while doing more to reduce emissions and support electrification.
The LCFS adds nearly 20 cents per gallon of gas and even more to diesel, but delivers little discernable benefit to Californians. It requires fuel suppliers to reduce their carbon intensity, largely by shifting toward biofuels made from corn, tallow, soybean oil, used cooking oil, and other sources. Companies import most of their biofuel from out-of-state at a price premium, passing the cost on to drivers.
This cost is only expected to rise as the state’s climate targets grow more stringent, pushing companies to further support biofuels as well as vehicle electrification. Under a worst case scenario, costs could rise as much as 85 cents per gallon over the next few years, exceeding the state gas tax, which is already the highest in the country. Sacramento can and should tightly cap LCFS costs to ensure that never happens.
While policymakers originally thought the LCFS would reduce greenhouse gas emissions, many researchers now find it has had little impact. Most of the biofuel that drivers pay extra for under the program would have been produced anyway due to a federal mandate, the Renewable Fuel Standard. It just would have been used in a different state. This redundancy will only get worse. The federal biofuel mandate expanded this year by a record amount, effectively requiring companies to produce almost all the biofuels that the LCFS then subsidizes.
And, to make matters worse, the small amount of biofuels that the LCFS may incentivize are likely to actually raise emissions. A recent UC Davis and Berkeley working paper found that diverting soybean oil and other vegetable oils to biofuel drove over 4 million acres of forest loss internationally, generating enough emissions to potentially make the biofuels more carbon-intensive than the fossil fuels they replace.
The program must be reformed to make any added cost for drivers worth it. The LCFS should at least be limited to fuels that aren’t mandated at the federal level. That would keep the program focused on emissions reductions that wouldn’t otherwise happen and exclude the most carbon-intensive biofuels.
But policymakers should also revamp the program to better support the electric vehicle transition. Less than a third of LCFS support last year went to electrification, much of it to electricity and electric vehicle rebates. Yet multiple new studies find that funding charging infrastructure instead is the most cost-effective lever governments have for promoting electric vehicle adoption. Light-duty electric vehicles are already cost-competitive for many buyers. What is keeping people out of them is access to chargers. A single fast charger, whether at an apartment building or on a highway, can serve dozens of electric vehicle owners while a vehicle rebate subsidizes only one, and frequently a well-off household that would have bought the car anyway. Redirecting the LCFS toward charging infrastructure, especially in the underserved corridors and apartment-dense neighborhoods that private investment has bypassed, would close the gap that is actually slowing electrification.
The war in Iran and closure of the Strait of Hormuz reminded Californians that they have little control over global oil markets. But they do have control over state policy. Sacramento may not be able to prevent the next geopolitical crisis from driving up fuel prices. But the legislature and the next governor can stop adding unnecessary costs on top of those shocks. Reforming the LCFS would be a good place to start.
At Breakthrough we’ve been digging into U.S. and California biofuel policy for the past few years. Here are a few highlights:
Biofuels increase food prices; incentivize more agricultural land-use and thus risk deforestation and other environmental problems; and are an inefficient way to support producers.
Crop-based biofuels, like the ones that California’s LCFS program incentivizes, drive deforestation, grassland conversion, and other land-use change around the world. Cropland expansion due to biofuel production has been significantly larger than initially projected.
California’s LCFS is paying for biofuels that are already incentivized by the U.S. federal Renewable Fuel Standard. So, not only does LCFS fail to actually reduce emissions, it is overcharging Californians for a biofuel incentive program that does not incentivize new biofuels.
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